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Why Performance Reviews Are Now Under Review

Source | LinkedIn : By Peter Cappelli

New Research Debunks Idea Annual Appraisals Can Predict Long term Employee Performance

We are coming to the end of the fiscal year (or half-year) for many organizations, which means we also are in the season for performance appraisals.

Virtually every employer has performance appraisals, including the government and the military. Yet surprisingly, the most basic questions about how well these performance reviews work have rarely been asked. Instead, we have preconceived notions that don’t match up to reality.

For example, both employees and employers believe that appraisal scores don’t vary much, and that most everyone gets an above-average score and few if any get poor scores. More important is the belief that the people who are good performers tend always to be good, and the poor performers tend always to be bad.

There is also a debate about how performance appraisals are used in practice. Perform well, and you get a good appraisal and a big merit pay increase, say economists, the investment community, and many top executives. But human-resource managers and management specialists see performance reviews as a way to improve an employee’s performance.

To find out how performance reviews are really used, we persuaded a large U.S. corporation to let us study all the performance appraisals and associated employment outcomes over seven years. Among other things, we found that appraisal scores did in fact vary quite a bit across individuals. Yes, there was an upward bias—the average employee was rated slightly above “average” on the appraisal scale—but the shape of the distribution looked surprisingly normal, with slightly more “poor” scores than “excellent” scores.

Perhaps the biggest surprise for many was that there was little evidence that good performers in one year would be good performers the following year. Knowing one year’s scores across the employees explained only one-third of the next year’s scores across the same employees. Changing managers didn’t appear to have any consistent effect on scores, contrary to the view that supervisors get cozy with subordinates and give them higher scores over time. There is no support for the simple idea that the workforce is made up of good performers who tend always to be good (A players), poor performers who tend always to be bad (C players) and another group always stuck in the middle (B players). Certainly there were employees who performed poorly over time, and they tended to get fired. But the notion that the appraisal score in any given year should be the basis for long-term outcomes—such as poor rankings leading to dismissals, as was the way at General Electric Co under Jack Welch—has no support in these results.

More generally, we found more evidence consistent with the notion that supervisors treated the appraisal process more like a continuing relationship than the settling up of an annual contract. The merit pay increases they gave rewarded employees for improvements in performance, not just for high levels of performance. They used their discretion to reward the best performers disproportionately and held back pay disproportionately for poor performers.

Certainly this only one company, although was nothing about it that would cause us to think that its experience with appraisals would be unique, nor are there studies available suggesting that these results aren’t true elsewhere. Those who are sure that appraisals in their own company don’t work the way they did in this case, in our experience, haven’t looked at their own data.

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